Investors looking for balance turn their attention to hotels

Investors seeking diversification of their portfolios are expected to turn to Europe’s hotel sector this year for it, according to JLL, which said that it expected to see an increase in core-plus capital funds being raised to invest into hotel real estate, led by private-equity groups.

Investment was expected to predominately come from investors already with a presence in Europe, and with investments across all assets classes, including hotels. This new capital, JLL said, would look for either single assets or portfolio opportunities across Europe and would target lower internal rates of return than typical opportunistic capital, i.e. a 5.5 percent to 6 percent dividend yield. Leverage, or borrowing, was likely to be conservative at 50 percent of the fund.

“The main reasons for the increase in core-plus funds coming to Europe are: investors are looking for balanced investments across Europe offering different return profiles; investors want exposure to different sectors; and hotels are now being seen as more mainstream and there is a buoyant travel market and positive hotel operating performance forecast.”

The message about hotels moving into the mainstream as an asset class was echoed by Savills, where the company expected the UK to benefit. Martin Rogers, head of UK hotel transactions, said, “Last year was a fantastic one for the UK hotels market as appetite for assets came from both domestic and overseas sources. The popularity of the UK has been boosted in 2017 by the rise of the staycation and the stability following the EU referendum in 2016. We expect this popularity to continue as hotels move further into the mainstream.”

Investment into the UK hotel market reached £5.4 billion across 219 deals in 2017, according to Savills. This total represented an increase of 32 percent from 2016, in which levels totaled £4.1 billion and were 51-percent above the 10-year average of £3.6 billion.

"The UK hotel market has benefitted from considerable cross border investment in 2017," said George Nicholas, head of global hotels at Savills. "A number of countries, including South Africa and Sweden, have considerably increased their presence in the market as UK hotel assets continue to provide long term security, an attractive quality for overseas investors.”

JLL’s "UK Property Predictions 2018" was cautious about the UK’s prospects looking into 2018, describing strong market fundamentals which would be “more muted” than 2017.

The weakening of the pound, following the Brexit vote, benefited hotels throughout the UK in 2017, with the number of inbound visitors expected to reach around 40 million by year-end, a 6-percent uptick compared to the prior year. This influx enabled hoteliers to boost average rates by around 5 percent in 2017.

"While we expect to see growth during 2018, the uncertainty over Brexit and slowdown in the UK economy may reduce business visits and dampen domestic spending, resulting in muted RevPAR growth," JLL commented. "In London, the addition of 7,800 new hotel rooms poses pressure on hotel performance; however, it is hoped that the increase in tourism activity will counterbalance this.”

The institutions were expected to continue to play a role in the UK, with leased hotels representing an attractive opportunity with a number of advantages over other commercial properties, from diversification to a long-term lease to a single tenant.

“The UK institutional market has invested heavily in leased hotels throughout 2017 as they continue to allocate investment funds towards the alternative sectors," JLL continued. "The result has seen a number of benchmark yields being achieved not only within Greater London but also regionally as demand continues to out strip supply. As we look to 2018, there is no sign of the demand falling. Although a number of investors may have filled their quota of specific covenant allocation, new money continues to be raised and new investment vehicles created. We expect yields to remain at current levels, although transaction levels may be slightly down.”

The IMF has forecast GDP growth of 1.5 percent for the UK, with the Eurozone at a healthier 1.9-percent clip, as the former is weighed down by Brexit fears and the latter starts to see the benefit of action taking during the debt crisis.

With brokers already pointing to a two-speed Europe, how long before developers start to treat the UK with caution?